Lenders Mortgage Insurance (LMI) is a financial product designed to protect lenders when borrowers have small deposits, typically less than 20% of the property's purchase price. It acts as a safety net for lenders by covering potential losses if borrowers default on their mortgage loans and the proceeds from selling the property are insufficient to repay the outstanding debt.
LMI essentially allows lenders to mitigate the increased risk associated with higher loan-to-value ratios (LVRs) and offer loans to borrowers with smaller deposits, thus facilitating homeownership. For many individuals aspiring to own a home, saving up a substantial deposit can be a significant obstacle. Without LMI, lenders may be hesitant to approve loans with low deposits due to the heightened risk of default. However, with LMI in place, lenders are more willing to extend loans to borrowers with smaller deposits, as they have a form of insurance to protect their interests in case of default.
It's important to note that while LMI provides a safety net for lenders, it does not directly benefit borrowers. Instead, borrowers are responsible for paying the LMI premiums, which can be paid upfront as a lump sum or added to the loan amount or interest payments. Despite the additional cost, many borrowers find that the ability to purchase a home with a smaller deposit outweighs the expense of LMI.
LMI is a very appropriate strategy if you don't have the required 20% deposit as it can help you get into a property sooner. By delaying and avoiding LMI to save up further deposit property prices may increase which therefore means you missed out and will now need to save more.
To determine the process around LMI (including any strategies to potentially mitigate it), please don't hesitate to contact me at 0401 225 713 or lmckean@lbklending.com.au.